China Tries To Slow Economy Again With Bank Reserve Hike

Required deposit reserve ratio for commercial lenders will rise on April 16 to 10.5%.

China's central bank on April 5 ordered major commercial banks to set aside more money in reserves in an effort to slow its economy, the third such cooling measure of 2007. The People's Bank of China said in a statement the action was designed to enhance bank liquidity management and prevent excessively fast credit growth. It said the required deposit reserve ratio for most commercial lenders would rise on April 16 by 0.5 percentage point to 10.5%.

The required deposit ratio was raised a similar 0.5 percentage point in January and February this year and three times in 2006. Last month, the benchmark one-year lending rate was raised by 0.27 percentage points.

China's booming economy, the world's fourth largest, expanded by 10.7% in 2006 and is likely to grow by 10% in 2007, the central bank said last week.

The central bank is fighting a rising tide of liquidity stemming from export earnings as well as outstanding sterilization paper that is reaching maturity. Sterilization is a technical term for central bank operations aimed at curbing liquidity rising as a result of an influx of foreign funds in a tightly controlled exchange rate regime such as China's.

It issued 966 billion yuan (US$125 billion) worth of sterilization paper in March alone, for a total of approximately 1.82 trillion yuan so far this year, according to Stone and McCarthy Research Associates. That marks a new record and is equivalent to half of last year's estimated 3.65 trillion yuan worth of central bank paper sold into the market.

Copyright Agence France-Presse, 2007

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